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Lord Whitty: These amendments are designed to improve the operation of Part II of the Landlord and Tenant Act 1987. They make clear that the right granted by that part to seek the appointment of a new

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manager would be applicable against any party appointed manager under a lease, and not just a landlord. They also deal with the restriction on exercising that right against a resident landlord.

The Government agree that there is a need to change the 1987 Act. Indeed, we consulted on this proposal when we were proposing the draft Bill. We are prepared to consider this proposal further, without commitment at this stage, to see whether it would be possible to bring something forward at a later stage of the Bill.

Lord Goodhart: I am most grateful to the Minister for agreeing to look at the matter again. I hope that the Government will be able to table a suitable amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9 agreed to.

[Amendment No. 238YA not moved.]

Baroness Gardner of Parkes moved Amendment No. 238ZA:

    Before Clause 139, insert the following new clause--


(" . After section 41 of the Landlord and Tenant Act 1987, insert--
"Reserve funds.
41A.--(1) Notwithstanding the specific terms of any lease of the whole or part of the building, where the tenants of two or more dwellings are required under the terms of their leases to contribute to the same costs by the payment of service charges, the person responsible for the exercise of the management of the premises under the lease shall establish one or more reserve funds to finance the repair and maintenance of the common parts and common services.
(2) Any demand for payment of service charges shall state the level of contribution within the total sum requested which will be paid into the reserve fund.
(3) The person responsible for the management of the premises may from time to time vary the level of contribution made to the reserve fund from the service charge contributions, but the level of contributions may not be nil.
(4) Regulations shall make provision for the preparation of a rolling management programme for repair and maintenance and for its presentation to the contributing tenants.
(5) In this section--
"service charge" means a service charge within the meaning of section 18(1) of the Landlord and Tenant Act 1985, other than one excluded from that section by section 27 of that Act (rent dwelling registered and not entered as variable); and
"the person responsible for the management of the premises" means either--
(a) the person who is the landlord under the lease,
(b) the Right to Manage company which has acquired the management functions under Part II of this Act, or
(c) a manager appointed under Part II of the 1987 Act to act in relation to the premises or any premises containing or contained in the premises".").

The noble Baroness said: The proposed amendment would amend the Landlord and Tenant Act 1987. It requires all buildings to establish one or more reserve

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funds. It is considered good management wherever possible to build up a reserve fund in order to cover the cost of planned major works or large renovation. However, many leases do not provide for a reserve fund. In those circumstances, some freeholders may look to borrow to fund the work and then charge the cost of borrowing back to the leaseholders through the service charge. Sometimes the leaseholders find themselves faced with a substantial service charge bill, and quite suddenly, to cover the cost of work which must be undertaken and paid for within that service charge year.

The amendment follows the format of Clause 38 which gives the commonhold association the power to establish reserve funds. Subsection (1) overrides the provisions of existing leases in order to establish a requirement to have a reserve fund. Subsection (2) requires the service charge demand to state how much of the money paid will be paid into the service charge fund.

Subsection (3) enables the manager to set the level of contribution, but insists that he cannot negate the purpose of setting up a reserve fund by setting the contribution as nil. The contribution level could still be set at a token figure--say, £1--which would allow those who wished not have a reserve fund to minimise the cost, but the counter argument to that would be that even a small sinking fund is preferable to none.

Subsection (4) empowers the Government to make regulations which can set out how the manager should establish a rolling programme of work, a budget of anticipated income and expenditure and the form in which this should be presented to the lessees.

The funds must be trust funds in accordance with Section 42 of the Landlord and Tenant Act 1987. The Committee will recall that the British Property Federation promoted an amendment to the provisions to establish reserve funds for commonhold units to ensure that they were trust funds. Leaseholders should also continue to enjoy all the relevant protection in relation to the reasonableness of service charges.

Under subsection (4), where the Government would be making regulations as to how to do it, it is very important that it should be well worked out because there is a need for an adequate amount to be in the reserve fund. However, as I have said in speaking to many earlier amendments, it is wrong that anyone should aim to set up an excessive reserve fund. That would be bad in two ways: first, that people would be asked to produce the money for such an excessive reserve fund; and, secondly, that there might be a tendency, particularly when management agents are involved, to do the work simply because the money is there. If the managing agent is on a commission of the work done, there is a double incentive for someone to propose unnecessary works. The issue needs to be thought through in that way and there needs to be some control over the amount in a reserve fund.

The noble Lord, Lord Whitty, said that he would consider houses in management schemes. That is a typical example in which someone must decide how much is required. Management schemes for houses

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that have been enfranchised and are now freehold are there to protect the environment and maintain the standard. However, no one wants to carry out excessively expensive schemes, particularly if the people who run those management schemes are the original freeholders and still retain a significant interest and it is in their interest to have the property maintained to a higher standard than is necessary.

Any credit built up in the reserve fund which relates to a leaseholder should be clearly identified as belonging to that property. If the person intends to sell the flat, or to move for any reason, that money will be taken into account when the property is sold. If, for example, there is £10,000 in the reserve fund to one's credit, one would expect the person who buys the flat to have the advantage of that money. Therefore, that would help to reduce the price of the flat and would be taken into consideration when determining that matter.

I received a letter from Mr Ernest H Shaw who said that he had replied to the government consultation document. He set out very extensively a method, which I can give to the Minister, to calculate the annual dilapidation cost paid in advance for variable service charges. There is a whole page of it here. I am very impressed that someone has put so much thought into it. I am slightly worried that it appears to involve a number of professional people and, therefore, a considerable amount of fees, which could impact upon the people who are asked to pay these service charges. I appreciate that this is a complex issue but it is an important matter to consider.

Mr Shaw, who is a lessee in an enfranchised establishment, writes:

    "I am appalled at the lack of intent on the part of my fellow lessees to ensure that an adequate reserve fund sum is correctly estimated and appropriately collected. The standard response from lessees is that they will not be here then, so it is of no concern of theirs"".

We have to guard against the possibility that people who have been in those flats for a long time are not disadvantaged because of the reluctance of others to maintain the standard. I beg to move.

5 p.m.

Baroness Hanham: I should like to speak to Amendment No. 239B which is in this group. To continue with service charges, one area of concern on the part of leaseholders is the protection of service charge moneys. Since the accountancy profession accepts no responsibility for protecting leaseholders' money under Section 21 of the Landlord and Tenant Act 1985, the certification of accounts suggested by the Act seems to promise protection. That provision refers to the necessity for certification of the accounts by a qualified accountant. However, the Act does not give any guidelines, code of practice, or auditing or accounting procedures which the accountant must follow; it does not even make it a requirement that generally accepted accounting principles must be followed. The result is that the certification principle is completely ineffective and no reliance may be placed upon it.

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This matter was recognised as one of many concerns in the consultation document in 1998. However, that concern was downgraded in the one that followed in August last year. The whole matter has retreated into obscurity in the Bill, in that it is not there at all. This amendment would restore the original concept by strengthening the 1985 Act.

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